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Water Quality Trading Program

What is
water quality trading?Water
quality trading represents a market based approach to achieving better
water quality at lower cost. It is an alternative to traditional command
and control regulation. Not only does it hold the potential of reduced
costs for point sources (factories, wastewater treatment plants, etc.)
to comply with water quality standards, it may be the best way to encourage
reduction of rampant non point source pollution such as agriculture and
urban land use, which are not regulated by the Clean Water Act. Water
quality trading is multi-disciplinary and integrates science, engineering,
policy, and economics. Stakeholders in a trading program can include industries,
wastewater treatment plants, local businesses, farmers, municipalities,
environmental NGOs, government officials, and citizen groups.

Trading is based on
the fact that sources in a watershed can face very different costs to
control the same pollutant. A trading program allots a certain number
of pollution credits
to sources collocated in the same watershed. The sources can choose to
pollute under their limit and sell their credits, or pollute over their
limit and purchase credits. If the limits and credits are properly allocated,
such as with a TMDL, the net effect will improve water quality in the
watershed, at lower cost than making each individual pollutant source
upgrade their equipment to comply. Trading can occur among point sources
and nonpoint sources. Depending on the structure of the program, sources
can trade directly or indirectly with each other. Several water quality
trading programs are underway nationwide, and some have been very successful,
including nitrogen trading in Long Island Sound, and nutrient trading
in the North Carolina Tar-Pamlico River Basin. These programs are saving
hundreds of millions of dollars while significantly reducing water pollution.

These are just some
of the key issues which are important to making a successful trading program:

• Presence of
a regulatory driver, such as a TMDL
• Presence of market drivers that make trading financially attractive
• Establishing a framework that reduces transaction costs and simplifies
the trading process, while still being transparent and compliant with
the Clean Water Act and state/local laws
• Avoiding hot spots of higher pollutant concentration and ensuring
equity for lower income residentsSource: US EPA Water Quality Trading Assessment
Handbook (2004), available at http://www.epa.gov/owow/watershed/trading/handbook/What is the Passaic Water Quality Trading Project?
The non-tidal portion of the Passaic River watershed encompasses 803 square
miles, with 669 square miles of the watershed in New Jersey. About 25%
of New Jersey’s population (i.e. 2 million people) lives in this
watershed. Three of New Jersey’s twenty watershed management areas
(WMAs 3,4, and 6) overlap with the non-tidal Passaic River watershed.

New Jersey has imposed
a rigorous in-stream water quality standard for phosphorus concentration
of 0.1 mg/l. Excess phosphorus can cause algal bloom, reduced dissolved
oxygen, and eutrophication of water bodies, which can result in fish kills
and drinking water supply problems.

Most of the 19 sewage
treatment plants in the non-tidal Passaic River watershed will need to
invest heavily on upgraded equipment to comply with the phosphorus standard.
A trading project has been proposed as a cost effective alternative to
meeting the phosphorus effluent standard. The project design, implementation
and evaluation will extend from 2005-2008. Last year the EPA tentatively
awarded a grant to fund development of the trading program.

The program will focus
on both point-point and point-nonpoint trading opportunities. Potential
participants include sewage treatment plants, municipal stormwater sources,
and farmers. Watershed studies have been completed for the Passaic and
a TMDL is near completion for waters impaired due to exceedance of the
0.1 mg/l phosphorus standard. This project will provide a cost-effective
way to implement the TMDL once it is completed. An active coalition of
point sources, the NJDEP, and a team of experts from Rutgers and Cornell
Universities have been assembled to complete this endeavor.Source: Obropta C.C. (2004), ‘Development,
Implementation, and Evaluation of a Water Quality Trading Program for
the Non-Tidal Passaic River Watershed’, Proposal to USEPA Targeted
Watershed Grants Program, available at: http://www.epa.gov/twg/2004/2004proposals/04passaic.pdf